COMMISSIONER OF WEALTH TAX VS AN. REDDY, TRUST B. HARISH REDDY
2001 P T D 1899
[243 1 T R 1951
[Andhra Pradesh High Court (India)]
Before Ms. S. V, Maruthi and T. Ranga Rao, JJ
COMMISSIONER OF WEALTH TAX
Versus
A.V. REDDY, TRUST B. V. HARISH REDDY and others
Case Referred No. 173 of 1990, decided on 06/10/1998.
(a) Wealth tax------
----Valuation of assets---Valuation of unquoted equity shares of company----if in provision for taxation advance tax paid is shown as liability it is not to be treated as liability---Indian Wealth Tax Act, 1957---IndianWealth Tax Rules, 1957, R. l D.
If in the case of balance-sheet of any company, the amount of advance tax paid is also shown .as a liability, i.e., if the said amount is included in the amount set apart as provision towards taxation, it would obviously have to be deleted from the column of liabilities. Clause (ii) in a sense complementary to clause (i)(a) of Explanation II to Rule 1D of Wealth Tax Rules, 1957. Truly speaking, the advance tax paid is not really an asset but the pro forma of balance-sheet in Schedule VI to the Companies Act requires it to be shown as such. What clause (i)(a) does is to remove the said amount from the list of assets for the purpose of rule ID. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. It cannot be remembered that the advance tax has already gone out of the profits and been debited in the account books of the company. This is the true function of both the sub clauses of Explanation II to rule 1 D:
Held, that for the purpose of computation of the market value of unquoted equity shares of a company if advance tax paid is again shown as liability it will not be treated as a liability.
Bharat Hari Singhania v. CWT (1994) 207 ITR(SC) fol,
(b) Wealth tax---
----Trust---Assessment---Beneficiary entitled to corpus of trust property after attaining age of twenty-five years---Beneficiary not attaining age of twenty five years---Interest of beneficiary in trust property alone is includible in net wealth of beneficiary---Indian Wealth Tax Act, 1957, S.21.
Since under subsections (1) and (4) of section 21 of the Wealth Tax Act, 1957, it is beneficial interests which are taxable in the hands of the trustees in a representative capacity and the liability of the trustee cannot be greater than the aggregate liability of the beneficiaries, no part of the corpus of the trust properties can be assessed in the hands of the trustee under section 3 and any such assessment would be contrary to the plain mandatory provisions of section 21:
Held, that, in the instant case, the assessees who were the beneficiaries under the trust were entitled to the beneficial interest from the hands of the trustees until they attain the age of 25 years and thereafter each of these beneficiaries was to be given full possession of the corpus of the trust property. In the assessment years under reference, the beneficiaries were not entitled to the absolute interest in the properties of the trust created in each of these trusts. Hence, the Tribunal was justified in directing the Wealth Tax Officer not to include the value of "corpus" of the trust of which the assessee was a: beneficiary but only the interest of the beneficiary in the trust property.
CWT v. Trustees of H.E.H. Nizam's Family (Reminder Wealth) Trust (1977) 108 ITR 555 (SC) fol.
S.R. Ashok for the Commissioner.
Y. Ratnakar for the Assessee.
JUDGMENT
MS. S.V. MARUTHI, J.---A reference is made at the instance of the Revenue. The assessee had shares in India Fruits (Pvt.) Limited. In computing the market value of the equity shares under rule 1D of the Wealth Tax Rules, 1957, deduction of provision for taxation as a liability should be restricted to the actual tax due on admitted profits after deducting advance tax already paid. On appeal, the appellate authority accepted the contention of the assessee that the full amount of provision for taxation as accepted without excluding therefrom the advance tax paid which appeared as an asset on the assets side in the balance-sheet should be deducted. The Appellate Authority accepted the contention of the assessee. On further appeal to the Tribunal, the Tribunal held that the advance tax paid would not fall to be deducted from the provision for taxation appearing on the liability side. In holding as above, the Tribunal followed its decision in the case of the assessee for the earlier year. However, at the instance of the Revenue, the following question No. l was referred for the opinion of this Court:
"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for purposes of computation of market value of unquoted equity shares of a company., the advance tax paid cannot be deducted from the tax payable, in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Explanation II to rule 1D of the Wealth Tax Rules, 1957?"
The question is now covered by a judgment of the Supreme Court in Bharat Hari Singhania v. CWT (1994) 207 ITR 1, wherein it was held that (page 3I):
"However, if in the case of the balance-sheet of any company, the said amount of advance tax paid is also shown as a liability, i.e., if the said amount is included in the amount set apart as provision towards taxation, it would obviously have to be deleted from the column of liabilities---and this is also what the aforesaid words in clause (ii)(e) say. Clause (ii)(e) is in a sense complementary to clause (i)(a). Truly speaking, the advance tax paid is not really an asset but the pro forma of balance-sheet in Schedule VI to the Companies Act requires it to be shown as such. What clause (i)(a) does is to remove the said amount from the list of assets for the purpose of rule 1D. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. It must be remembered that the advance tax has already gone out of the profits and been debited in the account books of the company. This is the true function of both the sub-clauses. The situation is best explained by giving an illustration. Take a case where a company has paid Rs.8 lakhs by way of advance tax which is shown as an asset in the balance-sheet. The company has made a provision of Rs.15 lakhs for taxation which is shown as', a liability in the balance-sheet. The Wealth Tax Officer estimates the tax payable on the basis of book profits at Rs.10 lakhs. What he is asked to do by clause (ii)(e) is not to treat the excess Rs.5 lakhs as a liability. The tax liability as arrived at by him is only Rs.10 lakhs, but inasmuch as Rs.8 lakhs has already been paid and only Rs.2 lakhs remains payable, the said Rs.2 lakhs alone will be treated as a liability on the valuation date. It must be remembered that Rs.8 lakhs already paid is deleted from the 'assets' shown in the balance-sheet. What is shown as an asset cannot at the same time be shown as a liability. This does not mean that tax liability is treated by the Wealth Tax Officer only as Rs.2 lakhs. It is Rs.10 lakhs. Rs. 8 lakhs has already gone out of the profits and debited in the books of the company. By reading clause (i)(a) and clause (ii)(e) together, the assessee will be getting the benefit of entire Rs.10 lakhs but so far as the balance-sheet for the purpose of rule 1D is concerned, only Rs.2 lakhs will be treated as a liability on the valuation date since that is the actual amount still outstanding: We do not think that if the aforesaid clauses are understood as explained herein, there is any prejudice to the assessee or to the Revenue. "
Following the above decision, we answer the question in the negative and in favour of the Revenue.
The assessees who are the beneficiaries under the trust are titled to the beneficial interest from the hands of the trustees until en they attain the age of 25 years thereafter each of these beneficiaries are to be given full possession of the corpus of the trust property. In the assessment years under reference, the beneficiaries are not titled to the absolute interest in the properties of the trust created in. each of en these trusts. It was claimed that the interest of the beneficiary alone to be taken. The Wealth Tax officer did not accept this submission. On is appeal, the Appellate Assistant Commissioner held that the entire value of the corpus cannot be included in the net wealth but only the beneficial the interest. On further appeal to the Tribunal, it was held that the entire corpus cannot be taken into account but only the beneficial interest of the assessee should be included for the purpose of the wealth tax. However, at the instance of the Revenue, referred the following question for the opinion of this Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Wealth Tax officer not to include the value of 'corpus' of the trust of which the assessee is a beneficiary but only the interest of the beneficiary in the trust property?
The question involved is now covered by a judgment of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Fly (Remainder Wealth) Trust (1977) 108 ITR 555, wherein it was held as follows (headnote):
"Since under subsections (1) and (4) of section 21 it is the beneficial interests which arc taxable in the hands of the trustees in a representative capacity and the liability of the trustee cannot be greater than the aggregate liability of the beneficiaries, no part of the corpus of the trust properties can be assessed in the hands of the trustee under section 3 and any such assessment would be contrary to the plain mandatory provisions of section 21 a question in the
Following the above decision, we answer the question affirmative and in favour of the assessee.
Reference is answered accordingly. No costs.
M.B.A./458/FC Reference answered